The following is a guest blog post by Matt Waltrich, Vice President of Payer Solutions at RemitDATA.As the market continues to evaluate alternative pricing models, bundled pricing shows great promise

Imagine this: Your car needs new brakes and your auto shop tells you the cost is in the range of $150 to $3,000. They tell you to pay $500 now since that’s the amount you have on hand. The next day, the service is done and you pick up your car. Thirty days later, you receive a $700 bill for ‘rotor installation time and materials’. When you call, they explain that the staff mechanic was off that day and they had to bring in an expert to fill in. A few days later you get another bill for $350 for additional work that was needed on your calipers. When you call the auto shop again, they tell you they don’t control ‘third party costs.’ You were never told up front about these costs, and you are now on the hook for $1,050 in extra fees. Time to find a new auto shop.

Sadly, in the world of healthcare, this is not an uncommon scenario, where $1,050 could just as easily be a financially crushing $105,000 unexpected medical bill.

Although healthcare pricing models have traditionally been designed around fee for service, payer/provider contract rates are often complex, with little transparency and consistency for the patient. In May 2013 the Centers for Medicare & Medicaid Services (CMS) reported huge discrepancies in the prices that hospitals charge for common in-patient procedures. This echoes the perception that pricing set by providers is often arbitrary, such that only the uninsured are charged the list rates. In some cases, pricing even seems to be disconnected from the actual cost of care, with inflated rates offsetting negotiated discounts.

In an effort to address this, provisions within the Affordable Care Act (ACA) are targeting how healthcare is organized, delivered, and paid for. For example, the Bundled Payments for Care Improvement (BPCI) initiative was created by the ACA to increase fee for service reimbursements for Medicare based on alternative payment models (APM) and to increase the percentage of reimbursements linked to quality and value. Reimbursements are aligned with four broadly defined models. These models bundle payments for multiple services under individual episodes of care. With BPCI organizations enter into payment arrangements that include financial and performance accountability for these episodes of care. The goal is higher quality and more coordinated care at a lower cost to Medicare.

The industry will watch models like this closely. Applied more broadly, pricing models like BPCI can give payers a new approach to deliver greater value to providers and patients. Bundled pricing makes it easier for patients to compare medical costs and understand how procedures are valued, including the cost of the facility and providers. This approach empowers patients to price compare, and seek out low cost, high quality care.

Some health plans have already implemented their own alternative payment models, for example:

In 2008, Blue Cross Blue Shield of Massachusetts developed its Alternative Quality Contract (AQC) which gives provider groups an annual budget for meeting all the healthcare needs of their patients while still hitting quality targets.

In 2011, CaroMont Health and Blue Cross and Blue Shield of North Carolina (BCBSNC), implemented a bundled payment arrangement for an entire knee replacement.

As payers begin to invest in implementing more bundled payment initiatives, the application of comparative analytics can help guide payers toward identifying the greatest opportunities to impact cost of care. By examining historical claims data, payers can identify their highest volume and cost procedures (grouped by episodes of care) to establish actual prices. By applying these pricing methodologies, payers can reduce costs with a consumer-driven model that focuses on value-based choices.

Several factors should be considered in determining the success of these models:

Provider willingness to embrace risk/reward models

The ability for providers to collaborate amongst themselves and effectively manage payment distribution for episodes of care in a coordinated fashion.

The alignment of plan benefit designs that encourage members to use providers in bundled payment arrangements.

With proper development and application, bundled pricing models have the potential to drive significant change in the industry by lowering cost of care, improving outcomes, and giving health care consumers better transparency around true costs. With the broad adoption of alternative payment models throughout the healthcare industry, surprise bills and unanticipated fees may become a thing of the past.